Notice 2018-99 requested comments

for future guidance to further clarify the treatment of QTFs under section 274. In particular, the Treasury Department and the IRS requested comments on the definitions of “primary use” and “general public”, whether primary use should be used to determine the extent to which parking is made available to the general public under section 274(e)(7), other methodologies for determining the use of the parking spaces and the related expenses allocable to employee parking, the applicability of section 274(e)(8) to expenses for any goods or services that constitute a QTF sold by the taxpayer to an employee in a bona fide transaction for an adequate and full consideration in money or money’s worth, and the circumstances under which such a transaction should be excluded from the term QTF for purposes of section 274(a) (4).

The Treasury Department and the IRS received approximately 500 comments in response to Notice 2018-99. All comments were considered in drafting these proposed regulations and are available at www.regulations.gov or upon request. Approximately 200 comments addressed issues involving section 512(a)(7), which was retroactively repealed, as explained in part 1 of the Background. Approximately 70 comments expressed support for the disallowance of parking expenses in section 274(a)(4) on environmental policy grounds and encouraged the Treasury Department and the IRS to further discourage employers from subsidizing employees that drive to work. The majority of the remaining comments requested additional methodologies and simplified rules for taxpayers that own or lease parking facilities to calculate the amount of the parking expense disallowance.

Several of the comments addressing section 274(a)(4) are summarized in the Explanation of Provisions. However, comments recommending statutory revisions or addressing issues outside the scope of these proposed regulations, such as environmental policy issues, are not addressed.

Explanation of Provisions

The proposed regulations describe and clarify the statutory requirements of section 274(a)(4) and 274(l), as well as the applicability of certain exceptions under section 274(e) to QTF expenses. To implement the TCJA’s disallowance of deductions for QTF expenses under section 274(a)(4), the proposed regulations create a new §1.274-13 (proposed §1.274-13) to address QTF expenses paid or incurred by an employer, and the application of certain exceptions in section 274(e) to QTF expenses. Further, the proposed regulations create a new §1.274-14 (proposed §1.274-14) to address transportation and commuting expenses paid or incurred by an employer. As discussed in part 2 of the Background, the statutory changes made by the TCJA apply to QTF expenses paid or incurred by employers after December 31, 2017.

1. Qualified Transportation Fringes

A. In General

Proposed §1.274-13 restates the statutory rules under section 274(a)(4), defines relevant terms, and modifies certain guidance in Notice 2018-99, providing a general rule and three simplified methodologies to determine the amount of nondeductible parking expenses when a parking facility is owned or leased by the taxpayer. Additionally, the proposed regulations build on Notice 2018-99 to include rules addressing the deduction disallowance for expenses related to providing employees transportation in a commuter highway vehicle and transit pass QTFs.

The proposed regulations include special rules to clarify and simplify the calculations underlying the methodologies to determine the amount of QTF parking expenses. In addition, the proposed regulations generally apply the guidance in No

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tice 2018-99 and the applicable exceptions in section 274(e) to all QTF ­expenses.

Specifically, as in Notice 2018-99, the proposed regulations provide that if the taxpayer pays a third party for its employee’s QTF, the section 274(a)(4) disallowance is generally calculated as the taxpayer’s total annual cost of the QTF paid to the third party. With regard to QTF parking expenses, the proposed regulations provide that if the taxpayer owns or leases all or a portion of one or more parking facilities, the section 274(a)(4) disallowance may be calculated using a general rule, as defined below, or any one of three simplified methodologies. Taxpayers may choose to apply the general rule or a simplified methodology for each taxable year and for each parking facility. Special rules and definitions are included in the proposed regulations for allocating certain mixed parking expenses, aggregating parking spaces by geographic location, removing inventory/unusable spaces from available parking spaces, defining general public for multi-tenant building parking facilities, and disregarding five or fewer reserved parking spaces if the reserved spaces are 5 percent or less of total parking spaces. Taxpayers may use statistical sampling with the general rule or simplified methodologies if they follow the procedures in Rev. Proc. 2011-42, 2011-37 I.R.B. 318, as corrected by Ann. 2013-46, 2013-48 I.R.B. 593. The general rule in the proposed regulations allows taxpayers to calculate the disallowance based on a reasonable interpretation of section 274(a)(4). However, taxpayers must use the expense paid or incurred in providing a QTF instead of its value to an employee, allocate parking expenses to reserved employee spaces, and properly apply the exception for parking made available to the general public. A special rule for aggregating parking spaces by geographic location may be used with the general rule.

The proposed regulations also include three simplified methodologies that taxpayers may use instead of the general rule. Under the first simplified methodology, the “qualified parking limit methodology,” taxpayers calculate the disallowance by multiplying the total number of spaces used by employees during the peak demand period, or, alternatively, the total

number of the taxpayer’s employees, by the section 132(f)(2) monthly per employee limitation on exclusion for qualified parking ($270), for each month in the taxable year.

The second simplified methodology, the “primary use methodology,” is largely based on the method deemed reasonable in Notice 2018-99, modified in response to comments received. Special rules for allocating certain mixed parking expenses and aggregating parking spaces by geographic location may be used with the primary use methodology. Definitions in Notice 2018-99 for employee, general public, parking facility, total parking spaces, reserved employee spaces, reserved nonemployee spaces, primary use, and total parking expenses, as modified in response to comments, are also included in the proposed regulations. New definitions for geographic location, inventory/unusable spaces, available parking spaces, peak demand period, and mixed parking expense are included in the proposed regulations to clarify the methodology in response to comments received.

The final simplified methodology is the “cost per space methodology,” which allows taxpayers to calculate the disallowance by multiplying the cost per parking space by the number of available parking spaces to be used by employees during the peak demand period. Cost per space is calculated by dividing total parking expenses (including expenses for inventory/ unusable spaces) by total parking spaces (including inventory/unusable spaces). Special rules for allocating certain mixed parking expenses and aggregating parking spaces by geographic location may be used with the cost per space methodology.

B. Definitions

As described below, the proposed regulations generally include the definitions from Notice 2018-99, modified in response to comments received, along with new definitions to clarify terms as needed.

i. Qualified Transportation Fringe

The proposed regulations add a definition for the term “qualified transportation fringe.” The definition is based on section 132(f)(1), except that it does not include

qualified bicycle commuting reimbursements for the reasons described in part 2 of the Background. Thus, the proposed regulations provide that the term “qualified transportation fringe” means any of the following provided by an employer to an employee: transportation in a commuter highway vehicle if such transportation is in connection with travel between the employee’s residence and place of employment (as described in sections 132(f) (1)(A) and 132(f)(5)(B)); any transit pass (as described in sections 132(f)(1)(B) and 132(f)(5)(A)); or qualified parking (as described in sections 132(f)(1)(C) and 132(f)(5)(C)).

ii. Employee

The proposed regulations include the definition of the term “employee,” which is taken from §§1.132-1(b)(2)(i) and 1.132-9(b), Q/A-5 and Q/A-24. Commenters have asked whether volunteers are treated as employees under Notice 2018-99, although most of the comments concerning the status of volunteers related to section 512(a)(7), which has been retroactively repealed. The term “employee” for Federal tax purposes generally is understood to refer to a common-law employee (although the regulations under section 132 also include certain statutory employees such as officers of corporations in the definition of employee for purposes of QTFs). Whether a service provider is a common-law employee generally turns on whether the service recipient has the right to direct and control the service provider, not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished. See, e.g., §31.3121(d)-1(c)(2) of the Employment Taxes and Collection of Income Tax at Source Regulations. The determination does not depend on whether or how the individual is compensated, or by which person. The employment status of a volunteer depends on the facts and circumstances in each case. Accordingly, the proposed regulations do not address the employment status of volunteers.

iii. General Public

Commenters raised concerns that, for taxpayers that lease space in a multi

July 6, 2020 48 Bulletin No. 2020–28

tenant building, Notice 2018-99 did not include employees, partners, 2-percent shareholders of S corporations, independent contractors, clients, or customers of unrelated tenants in the building as members of the general public. In response to these comments, the proposed regulations modify the definition of the term “general public” from Notice 201899 to include employees, partners, 2-percent shareholders of S corporations, sole proprietors, independent contractors, clients, or customers of unrelated tenants in multi-tenant buildings, as well as customers, clients, or visitors of the taxpayer, individuals delivering goods or services to the taxpayer, students of an educational institution, and patients of a health care facility.

iv. Parking Facility

The proposed regulations include a definition of the term “parking facility” that follows the definition of qualified parking in section 132(f)(5)(C) and includes one or more indoor or outdoor garages and other structures, as well as parking lots and other areas where employees may park. Commenters suggested that because qualified parking as defined in section 132(f)(5)(C) and §1.132-9(b), Q/A-4(c) does not include any parking on or near property used by the employee for residential purposes, including parking for resident employees of residential rental buildings, the definition of “total parking spaces” should exclude such spaces. In response to these comments, the proposed regulations specifically exclude parking spaces on or near property used by the employee for residential purposes from the definition of parking facility.

v. Geographic Location

Commenters have asked how a geographic location is defined for purposes of aggregating the number of parking spaces to determine the section 274(a)(4) disallowance using the primary use methodology. Specifically, Notice 2018-99 provides that if a taxpayer owns or leases more than one parking facility in a single geographic location, the taxpayer may aggregate the number of spaces in those parking facilities. However, if a taxpayer

owns or leases parking facilities in more than one geographic location, the taxpayer may not aggregate the spaces in parking facilities that are in different geographic locations.

In response to these comments, the proposed regulations add a definition of the term “geographic location” as contiguous tracts or parcels of land owned or leased by the taxpayer. Two or more tracts or parcels of land are contiguous if they share common boundaries or would share common boundaries but for the interposition of a road, street, railroad, stream, or similar property. Tracts or parcels of land which touch only at a common corner are not contiguous. The proposed regulations follow Notice 2018-99 and allow taxpayers to aggregate the number of parking spaces in a single geographic location to determine the section 274(a)(4) disallowance using the general rule, primary use methodology, or cost per space methodology.

vi. Total Parking Spaces

The proposed regulations define the term “total parking spaces” as the total number of parking spaces in the parking facility. New terms “available parking spaces” and “inventory/unusable spaces” are added to the proposed regulations and the definition of the term “parking facility” is clarified in response to comments received.

vii. Reserved Employee Spaces

A commenter recommended that the definition of the term “reserved employee spaces” be limited to parking spaces actually used by employees on a typical business day. Because section 274(a)(4) disallows the deduction for the expense of providing a QTF to an individual employee, the commenter reasoned that the taxpayer should identify the expense for each QTF provided to each individual employee when determining the amount that is disallowed.

After considering the comment, the Treasury Department and the IRS have determined that costs allocated to reserved employee spaces should be disallowed regardless of actual use of the reserved spaces. However, a special rule is included in

step 1 of the primary use methodology providing that there is no disallowance for reserved employee spaces if the primary use of the available parking spaces is to provide parking to the general public, there are five or fewer reserved employee spaces, and the number of reserved employee spaces is 5 percent or less of the total parking spaces in the parking facility.

viii. Reserved Nonemployee Spaces

A commenter suggested that parking spaces reserved for drivers with disabilities be treated as “reserved nonemployee spaces” and as such, any related expenses not be disallowed under section 274(a) (4). After considering the comment, the Treasury Department and the IRS have determined that the proposed regulations should not include parking spaces reserved for drivers with disabilities in the definition of reserved nonemployee spaces. Unlike parking spaces reserved for customers or visitors, parking spaces reserved for drivers with disabilities may be used by employees (with disabilities), and section 274(a)(4) would then apply to disallow the expense. Parking spaces reserved for drivers with disabilities are also not included in “reserved employee spaces” because they may or may not be exclusively reserved for employees.

ix. Inventory/Unusable Spaces

The Treasury Department and the IRS received questions and comments on how parking spaces reserved for, or used by, inventoried vehicles are to be treated for purposes of determining the disallowance. For example, taxpayers asked whether parking spaces reserved exclusively for, or used by, vehicles to be sold or leased to customers at a car dealership or car rental agency are treated as spaces available to the general public.

In response to the comments and questions received, the proposed regulations add a new definition for the term “inventory/unusable spaces” that includes parking spaces used for inventoried vehicles, qualified nonpersonal use vehicles (as described in §1.274-5(k)), other fleet vehicles used in a taxpayer’s trade or business, or otherwise not usable for parking by employees.

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Inventory/unusable spaces are specifically excluded from the definitions of “available parking spaces,” discussed later, and “reserved nonemployee spaces,” discussed earlier, under the primary use methodology and primary use test in the proposed regulations. The proposed regulations exclude inventory/unusable spaces because those spaces are generally not available to employees or the general public but are instead used for other purposes. Inventory/unusable spaces are included in total parking spaces under the cost per space methodology because taxpayers do incur costs in maintaining the spaces.

x. Available Parking Spaces

The proposed regulations add a new definition for the term “available parking spaces” to clarify that reserved employee spaces and inventory/unusable spaces are not included in determining primary use under the primary use methodology.

xi. Primary Use

The Treasury Department and the IRS received numerous comments on the primary use test used in step 2 of the fourstep method in Notice 2018-99 to determine the extent to which parking is made available to the general public under section 274(e)(7). Notice 2018-99 provides that “primary use” means greater than 50 percent of actual or estimated usage by the general public of the parking spaces in the parking facility.

Several commenters suggested that primary use should mean greater than 85, 90, or 95 percent of actual or estimated usage by the general public, thereby applying the exception in section 274(e)(7) only to taxpayers with less than 15 percent actual or estimated usage by employees. Other commenters suggested that 50 percent is fair and reasonable.

After considering the comments received, the Treasury Department and the IRS have decided to retain the primary use test as described in Notice 2018-99 as a reasonable interpretation of the exception in section 274(e)(7) for parking made available to the general public. This interpretation is consistent with recent proposed regulations addressing the application of the section 274(e)(7) exception to

the limitation on deduction for meals and entertainment expenses. See 85 FR 11020 (February 26, 2020). Specifically, the proposed regulations for meals and entertainment expenses (proposed §1.274-11 and §1.274-12) include a definition of the term “primarily consumed” that means greater than 50 percent of actual or reasonably estimated consumption.

xii. Total Parking Expenses

Commenters suggested that safety-related expenses, such as lighting, snow and ice removal, leaf removal, trash removal, cleaning, and security, should be excluded from the definition of “total parking expenses.” Commentators reasoned that including the expenses may encourage unsafe parking conditions and neglect of care in maintaining the parking facilities.

Commenters also requested the removal of indirect costs, such as utility costs, insurance, property taxes, snow and ice removal, leaf removal, trash removal, cleaning, parking lot attendant expenses, and security. Multiple commenters also suggested adding depreciation to total parking expenses, reasoning that these are costs of parking facilities.

After considering the comments received, the Treasury Department and the IRS have determined that the proposed regulations should adopt the definition of the term “total parking expenses” from Notice 2018-99. Section 274(a)(4) disallows a deduction for the expense of providing a QTF, without regard to whether the expense is required for safety reasons. Further, QTF parking expenses include indirect costs such as allocable salaries for security and maintenance personnel, property taxes, repairs and maintenance, etc. See Joint Committee on Taxation, General Explanation of Public Law 115-97 (JCS-1-18), at 190, December 2018. However, as explained in Notice 2018-99 and in part 2.B. of the Background, a deduction for an allowance for depreciation is not included in total parking expenses because it is an allowance for the exhaustion, wear and tear, and obsolescence of property, and not a parking expense.

xiii. Mixed Parking Expense

Numerous commenters expressed concerns and asked questions about how to

determine the amount of expenses allocable to a parking facility if the invoice does not separate parking facility expenses from nonparking facility expenses. Commenters explained that determining and allocating expenses may impose excessive and unduly burdensome recordkeeping requirements on taxpayers and may be difficult for taxpayers and the IRS to administer. Commenters noted that such expenses for parking and nonparking property may include rent or lease payments, repairs, maintenance, utility costs, insurance, property taxes, interest, snow or ice removal, and security. In response to the comments, the Treasury Department and the IRS have included in the proposed regulations a definition for the term “mixed parking expense” and a special rule for allocating certain mixed parking expenses. “Mixed parking expense” is defined as an amount paid or incurred by a taxpayer for both a parking facility and nonparking facility property that a taxpayer owns or leases. The special rule for allocating certain mixed parking expenses to a parking facility is explained in part 1.C of this Explanation of Provisions.

xiv. Peak Demand Period

In these proposed regulations, several of the methodologies for determining the section 274(a)(4) disallowance for parking facilities require the taxpayer to determine the total number of parking spaces used by employees during the peak demand period for employee parking on a typical business day. Thus, the proposed regulations provide that for purposes of proposed §1.274-13, the term “peak demand period” means the period of time on a typical business day when the greatest number of the taxpayer’s employees are utilizing parking spaces in the taxpayer’s parking facility. If a taxpayer’s employees work in shifts, the peak demand period would take into account the shift during which the largest number of employees park in the taxpayer’s parking facility. However, a brief transition period during which two shifts overlap in their use of parking spaces, as one shift of employees is getting ready to leave and the next shift is reporting to work, may be disregarded. Taxpayers may use any reasonable methodology to determine the total number of

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spaces used by employees during the peak demand period on a typical business day, for example based on periodic inspections or employee surveys.

The recent Coronavirus Disease (COVID-19) pandemic highlights that taxpayers may experience significant variations in employee parking during the taxable year due to a national emergency or other type of disaster. The Treasury Department and the IRS request comments on what additional rules, if any, are needed to address significant variations in employee parking during the taxable year and whether any additional rules should apply to all taxpayers generally or should be triggered only upon certain events.

C. Special Rules for QTF Parking Expenses

Multiple commenters expressed concerns and asked questions regarding how to allocate mixed parking expenses. Commenters suggested the use of a special rule that would allow the taxpayer to allocate a certain percentage of the taxpayer’s mixed parking expenses, such as 5 percent, to a parking facility. Commenters also recommended that taxpayers be permitted to allocate mixed parking expenses by comparing rent or lease payments for leases with and without parking facilities or comparing the value of similar nonparking facilities with and without parking facilities.

In response to concerns raised by commenters, the proposed regulations include a special rule for certain mixed parking expenses to reduce administrative burdens for taxpayers and simplify calculations in complying with section 274(a)(4). Specifically, the proposed regulations provide that a taxpayer may choose to allocate 5 percent of certain mixed parking expenses to the parking facility. This special rule applies to mixed parking expenses related to payments under a lease or rental agreement, and payments for utilities, insurance, interest and property taxes. The special rule to allocate certain mixed parking expenses may only be used in the primary use methodology and cost per space methodology and may not be used with the general rule or the qualified parking limit methodology. Taxpayers are not required to use the special rule for certain mixed

parking expenses and may instead use any reasonable methodology for mixed parking expenses.

The proposed regulations also include a special rule allowing taxpayers to aggregate the number of parking spaces in a single geographic location. The rule generally follows the rule in Notice 2018-99, but in response to comments adds a definition of the term “geographic location,” which is based on tracts or parcels of land that are contiguous. The special rule for aggregation of parking spaces in a single geographic location may be used with the general rule, primary use methodology, and cost per space methodology, but may not be used with the qualified parking limit methodology.

D. Calculation of Disallowance of QTF Parking Expenses

The proposed regulations follow Notice 2018-99 and provide that if a taxpayer pays one or more third parties an amount for its employees’ QTFs, the section 274(a)(4) disallowance is equal to the taxpayer’s total annual cost for the QTFs paid or incurred to third parties. A commenter suggested that if a taxpayer pays a third party for parking spaces that are not assigned to specific employees, some of which are not used (for example, taxpayer leases 10 spaces and only has 8 employees), the disallowance should be limited to parking spaces actually used by employees on a typical business day. After considering the comment, the Treasury Department and the IRS determined that amounts paid to a third party for qualified parking in such situations should be disallowed regardless of actual employee use of the spaces because the taxpayer paid or incurred the expense for its employees’ QTFs regardless of employee use.

If instead, the taxpayer owns or leases a parking facility, the taxpayer may use the general rule or choose any of the following three simplified methodologies for each parking facility to determine the section 274(a)(4) disallowance for each taxable year.

i. General Rule

Multiple commenters requested guidance on additional methodologies that

may be used to calculate the disallowance under section 274(a)(4). In response to these comments, the Treasury Department and the IRS determined that taxpayers may calculate the disallowance using a general rule if the calculation is based on a reasonable interpretation of section 274(a) (4), as long as the taxpayer’s methodology does not use the value of a QTF instead of its expense, fail to allocate parking expense to reserved employee spaces, or improperly apply the exception for qualified parking made available to the public (for example, by treating a parking facility regularly used by employees as available to the public merely because the public has access to the parking facility).

ii. Qualified Parking Limit Methodology

Multiple commenters suggested that a standard cost per parking space similar to the standard mileage rate or per diem rate be used to determine the disallowance under section 274(a)(4). Other commenters suggested that a national average fair market value per parking space be used.

In response to the comments received, the Treasury Department and the IRS have determined that the maximum monthly dollar amount under section 132(f)(2), adjusted for inflation, may be used as a simple estimate of the taxpayer’s monthly total cost per parking space. The adjusted maximum monthly excludable amount for 2020 is $270 per employee. Using the qualified parking limit methodology, taxpayers may determine the disallowance simply by multiplying the section 132(f)(2) monthly per employee limitation on the exclusion by the total number of spaces used by employees during the peak demand period. Alternatively, the proposed regulations provide that taxpayers using this methodology may instead multiply the section 132(f)(2) monthly per employee limitation on the exclusion by the total number of the taxpayer’s employees.

Section 274(e)(2) and proposed §1.274-13(e)(2)(i) provide that the section 274(a)(4) disallowance for QTFs does not apply to the extent that a QTF is treated as compensation to an employee on the taxpayer’s return and as wages to the employee. A taxpayer using this qualified parking limit methodology who

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has monthly expenses per parking space exceeding the section 132(f)(2) monthly per employee limitation on the exclusion can deduct those excess expenses without regard to how much (if any) of the value of the parking space to the employee exceeds the section 132(f)(2) monthly per employee limitation on exclusion. However, these proposed regulations provide that the qualified parking limit methodology may be used only if the value of the QTF, to the extent it exceeds the sum of the amount paid (if any) by the employee for the QTF and the applicable statutory monthly limit in section 132(f) (2), is included on the taxpayer’s Federal income tax return as originally filed as compensation paid to the employee and as wages to the employee for purposes of withholding under chapter 24 (relating to collection of Federal income tax at source on wages).

Section 132(a)(5) excludes from gross income the value of a QTF up to the section 132(f)(2) monthly per employee limitation on exclusion, and therefore no amount for the value of QTFs up to the section 132(f)(2) monthly limitation can be included in an employee’s wages. Thus, the exception in section 274(e) (2) and proposed §1.274-13(e)(2)(i)(A) cannot be applied to the value of a QTF that is less than or equal to the monthly per employee limitation on exclusion in section 132(f)(2). Because this qualified parking limit methodology already limits the taxpayer’s expenses per parking space to the section 132(f)(2) monthly per employee limitation on exclusion, section 274(e)(2) cannot be used to reduce the disallowed expenses even further. For this reason, the proposed regulations provide that the exception to the disallowance for amounts treated as employee compensation provided for in section 274(e)(2) and in proposed §1.274-13(e)(2)(i) cannot be applied to reduce a section 274(a)(4) disallowance calculated using this method.

iii. Primary Use Methodology

The Treasury Department and the IRS received numerous comments on the four-step method in Notice 2018-99. The proposed regulations adopt the four-step method in Notice 2018-99, with revisions

in response to comments, and rename it as the “primary use methodology.” Comments received on the definition of primary use in Notice 2018-99 are discussed in part 1.B.xi. of this Explanation of Provisions.

The four-step method in Notice 201899 provides that employee use of parking spaces is determined by identifying the actual or estimated usage of the parking spaces during normal business hours on a typical business day. Multiple commenters suggested that taxpayers should instead be required to count the number of parking spaces in the parking facility actually used by employees. The Treasury Department and the IRS considered these comments and determined that, to ease the burden of counting actual spaces used by employees and provide a clearer standard, taxpayers must identify the number of available parking spaces used by employees during the peak demand period.

iv. Cost Per Space Methodology

Multiple commenters stated that the four-step method in Notice 2018-99 is cumbersome and complex. As an alternative, the Treasury Department and the IRS include in the proposed regulations the cost per space methodology, which allows taxpayers to calculate the disallowance by multiplying the cost per space by the number of spaces used by employees. Taxpayers must identify the number of available parking spaces used by employees during the peak demand period. Cost per space is calculated by dividing total parking expenses (including expenses related to inventory/unusable spaces) by the total number of spaces (including inventory/ unusable spaces).

v. Expenses for Transportation in a Commuter Highway Vehicle and Transit Pass QTFs